Politics, Economics, and the Political Economy

Many of us unconsciously believe that Gordon Gekko revealed the secrets of the universe to Bud Fox when he told him how finance guys run the world: "We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it.'"

Dr. George Friedman, the founder and CEO of the private intelligence corporation Stratfor, suggests that the opposite may be true: Financial and economic systems are defined by a broader political context.

In a piece published yesterday , Dr. Friedman writes: "The current economic crisis is best understood as a crisis of political economy. Moreover, it has to be understood as a global crisis enveloping the United States, Europe and China that has different details but one overriding theme: the relationship between the political order and economic life. On a global scale, or at least for most of the world’s major economies, there is a crisis of political economy."

Friedman traces the line of the crisis from the United States to Europe: "As we all know, the origin of the current financial crisis was the subprime mortgage meltdown in the United States. To be more precise, it originated in a financial system generating paper assets whose value depended on the price of housing. It assumed that the price of homes would always rise and, at the very least, if the price fluctuated the value of the paper could still be determined. Neither proved to be true. The price of housing declined and, worse, the value of the paper assets became indeterminate. This placed the entire American financial system in a state of gridlock and the crisis spilled over into Europe, where many financial institutions had purchased the paper as well."

Of Europe, where the political genesis of the financial crisis seems manifestly more evident—and where the centralized authority to manage fiscal policy seems seriously in doubt—Friedman writes this: "The sovereign debt question also created both a financial crisis and then a political crisis in Europe. While the American financial crisis certainly affected Europe, the European political crisis was deepened by the resulting recession. There had long been a minority in Europe who felt that the European Union had been constructed either to support the financial elite at the expense of the broader population or to strengthen Northern Europe, particularly France and Germany, at the expense of the periphery — or both. What had been a minority view was strengthened by the recession ."

But for Friedman, the politio-economic paradigm of the crisis doesn't preordain a single interpretation; it's an interpretative framework flexible enough to circumscribe, in this case, two opposite causal explanations.

As he notes: "There are two narratives to the story."

First, what may be the majority viewpoint among proponents of the open markets and free trade: "…[T]he German version, which has become the common explanation. It holds that Greece wound up in a sovereign debt crisis because of the irresponsibility of the Greek government in maintaining social welfare programs in excess of what it could fund, and now the Greeks were expecting others, particularly the Germans, to bail them out."

But also: "The Greek narrative, which is less noted, was that the Germans rigged the European Union in their favor. Germany is the world’s third-largest exporter, after China and the United States (and closing rapidly on the No. 2 spot). By forming a free trade zone, the Germans created captive markets for their goods. During the prosperity of the first 20 years or so, this was hidden beneath general growth. But once a crisis hit, the inability of Greece to devalue its money — which, as the euro, was controlled by the European Central Bank — and the ability of Germany to continue exporting without any ability of Greece to control those exports exacerbated Greece’s recession, leading to a sovereign debt crisis. Moreover, the regulations generated by Brussels so enhanced the German position that Greece was helpless."

Friedman points out that for classical economists, like Adam Smith or David Ricardo, the notion of 'economy' was logically inseparable from the broader concept of 'political economy', as evidenced by the fact that both economists conjoined the words in a set phrase.

The linguistic tic of Smith and Ricardo seems, for George Friedman, representative of a larger nearly transcendental premise: The notion that market economics exists in political vacuum is a naïve one.